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Financial and Ratio Analysis of Amgen

Note sure how to "compute the change (negative or positive) in diluted earnings". Please look at problem and explain thank you in advance. Please look at excel for easier formatting reading. Only thing I got is the two formulas for Return on assets and Return on equity otherwise I'm pretty much stuck with the questions in the problem.

Amgen is the leading company in the biotechnology industry. It has the largest market capitalization, sales, and earnings of any of its biotech competitors. Amgen's current earnings are driven by its two blockbuster products, Epogen and Neupogen. In fact, there are only two $1 billion drugs in the biotech industry and both belong to Amgen. Epogen, an anti-anemia drug, and Neupogen, an immune system stimulator, account for 90% of sales while a third drug, Infergen, has been commercialized as a possible treatment for hepatitis C.

The income statement, balance sheet, and statement of cash flows for Amgen are shown in Exhibit 1, 2, and 3, respectively.
Consolidated Statements of Operations
(In millions, except per share data)

Exhibit 1 Year ended December 31, 1998 1997 1996
Revenues:
Product sales $2,514.40 $2,219.80 $2,088.20
Corporate partner revenues 127.9 125.9 109.9
Royalty income 75.9 55.3 41.7
Total revenues 2,718.20 2,401.00 2,239.80

Operating expenses:
Cost of sales 345.2 300.8 283.2
Research and development 663.3 630.8 528.3
Selling, general and administrative 515.4 483.8 470.6
Loss of affiliates, net 28.6 36.1 52.8
Legal (award) assessment -23 157 ---
Total operating expenses 1,529.50 1,608.50 1,334.90

Operating income 1,188.70 792.5 904.9

Other income (expense):
Interest and other income, net 45.7 72.6 63.6
Interest expense, net -10 -3.7 -6.2
Total other income (expense) 35.7 68.9 57.4

Income before income taxes 1,224.40 861.4 962.3

Provision for income taxes 361.2 217.1 282.5

Net income $863.20 $644.30 $679.80

Earnings per share:
Basic $1.69 $1.22 $1.28
Diluted $1.63 $1.17 $1.21

Shares used in calculation of earnings per share:
Basic 510.1 528.3 529.7
Diluted 528.7 549.3 561.4

Exhibit 2
Consolidated Balance Sheets
(In millions, except per share data)

December 31, 1998 1997
Assets
Current assets:
Cash and cash equivalents $201.10 $239.10
Marketable securities 1,074.90 787.4
Trade receivables, net of allowance for doubtful 319.9 269
accounts of $17.1 in 1998 and $14.2 in 1997
Inventories 110.8 109.2
Other current assets 156.6 138.8
Total current assets 1,863.30 1,543.50

Property, plant and equipment at cost, net 1,450.20 1,186.20
Investments in affiliated companies 120.9 116.9
Other assets 237.8 263.6
$3,672.20 $3,110.20

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $121.60 $103.90
Commercial paper 99.7 ----
Accrued liabilities 659.7 608
Current portion of long-term debt 6 30
Total current liabilities 887 741.9

Long-term debt 223 229
Contingencies
Stockholders' equity:
Preferred stock; $.0001 par value; 5 shares
authorized; none issued or outstanding ---- ----
Common stock and additional paid-in capital; $.0001
par value; 750 shares authorized; outstanding?509.2
shares in 1998 and 516.6 shares in 1997 1,671.90 1,218.20
Retained earnings 894.3 943.2
Accumulated other comprehensive loss -4 -22.1
Total stockholders' equity 2,562.20 2,139.30
$3,672.20 $3,110.20

Exhibit 3 Consolidated Statements of Cash Flows
(In millions)

Year ended December 31, 1998 1997 1996
Cash flows from operating activities:
Net income $863.20 $644.30 $679.80
Depreciation and amortization 143.8 117.1 100.3
Other non-cash expenses 33.1 ---- ----
Gain on sale of investments -17.3 ---- ----
Deferred income taxes -5.6 -31.4 25.6
Loss of affiliates, net 28.6 36.1 52.8
Cash provided by (used in):
Trade receivables, net -50.9 -43.6 -26.1
Inventories -1.6 -11.8 -8.6
Other current assets -21.2 5 -11.8
Accounts payable 17.7 28.9 20.6
Accrued liabilities 51.7 158.3 -10
Net cash provided by operating
activities 1,041.50 902.9 822.6
Cash flows from investing activities:
Purchases of property, plant and
equipment -407.8 -387.8 -266.9
Proceeds from maturities of marketable
securities 20.1 244.3 168.3
Proceeds from sales of marketable
securities 466.2 647.1 762.4
Purchases of marketable securities -766.3 -767.5 -854.8
Increase in investments in affiliated
companies -6.5 -3.3 -14.6
Decrease (increase) in other assets 20.6 -35 -104.6
Net cash used in investing activities -673.7 -302.2 -310.2

Cash flows from financing activities:
Increase (decrease) in commercial paper $99.70 $ ---- ($69.70)
Repayment of long-term debt -30 -118.2 ----
Proceeds from issuance of long-term debt --- 200 ----
Net proceeds from issuance of common
stock upon the exercise of stock options
and in connection with an employee
stock purchase plan 345.5 134.3 112.6
Tax benefits related to stock options 108.2 54.7 48.6
Repurchases of common stock -912.1 -737.9 -450
Other -17.1 -63.8 -51.3

Net cash used in financing activities -405.8 -530.9 -409.8
(Decrease) increase in cash and cash
equivalents -38 69.8 102.6
Cash and cash equivalents at beginning of
period 239.1 169.3 66.7
Cash and cash equivalents at end of
period 201.1 239.1 169.3

Questions
1. Referring to Exhibit 1, compute the change (negative or positive) in diluted earnings per share between 1996-1997 and between 1997-1998.

2. Examine Exhibit 1 closely and see if you can come up with a reason for the relatively poor earnings per share figure for 1997. You do not actually have to compute ratios at this point, but see if you can find one expense account that impairs earnings the most in 1997.

3. Based on your answer to question 2, do you see the problem you identified as being continuing in nature?

4. Other firms in the industry, such as Biogen and Eli Lilly (which are in other industries as well) show the following returns on stockholders' equity for 1997 and 1998:
1997 1998
Biogen 15.60% 19.30%
Eli Lilly 26.20% 34.00%
Compute net income to stockholders' equity for Amgen for 1997 and 1998, using Exhibit 1 and Exhibit 2, and compare the results to its two competitors.

5. Breakdown return on stockholders' equity for 1998 for Amgen by using ratio formulas Return on assets and Return on equity. You should refer to Exhibit 1 and Exhibit 2 to get your data to use in the formulas.

6. Describe the relative importance of the profit margin, total asset turnover, and the total debt to total assets ratios in producing the return on stockholders' equity value you computed in question 5.

7. In the statement of cash flows (Exhibit 3), under the "Cash flows from financing activities" section, does the increase in commercial paper represent a source or use of funds?

8. The price of Amgen common stock was $20 at the beginning of 1997. What is the current stock price? (The company is listed on the NASDAQ). Has the company performed well in the stock market?

Attachments

Solution Preview

For your convenience, I have attached a formatted MS Excel spreadsheet containing the information listed below. I have also included within the spreadsheet, specific notes and reference sources, which can prove very useful towards increasing your understanding of the material.

Please feel free to contact me in the future.

Questions
1. Referring to Exhibit 1, compute the change (negative or positive) in diluted earnings per share between 1996-1997 and between 1997-1998.

1996-1997 1997-1998
% Change - Diluted EPS -3.3% 39.3%

2. Examine Exhibit 1 closely and see if you can come up with a reason for the relatively poor earnings per share figure for 1997. You do not actually have to compute ratios at this point, but see if you can find one expense account that impairs earnings the most in 1997.

In viewing Amgen's operating expenses for 1997, it can be seen that while the company's cost of sales, sg&a, and loss of affiliates grew modestly over previous year results, there was a significant increase in the company's legal costs ($157 million). Because of this unusually large outlay, the company's earnings were significantly impaired for the year.

3. Based on your answer to question 2, do you see the problem you identified as being continuing in nature?

No, the unusually large outlay for legal expenses in 1997 was (is) not a normal expense for the company, and was only undertaken in order to protect the company's drug pipeline against patent infringement. ...

Solution Summary

Financial analysis of Amgen for the years 1996, 1997, and 1998.

$2.19